2013 to Feel Brunt of Eurozone Bad Debt

A report has forecast that eurozone bad debt is a “ticking time bomb” for the continent’s economy with 2013 to feel the full effect of the situation.

The report, by Ernst & Young, warns that banks’ balance sheets will contract by a record margin in 2012 which will further constrain the supply of credit to businesses and consumers, but the “real impact” of Europe’s debt crisis will not arrive until 2013.

The accountancy firm said banks will shrink their balance sheets by €1.6 trillion (£1.3 trillion) this year as the result of asset disposals and a contraction in their lending activity – a sharper decline than during the financial ­crisis. As a result, it predicted that corporate lending will contract by 4.8pc in 2012, while consumer loans will fall by 6.6pc, which would represent the fastest pace of lending contraction on record for the eurozone.

However, next year looks even more “bleak” as the fallout from bad debts is felt across Europe, Ernst & Young’s Eurozone Financial Services Forecast said.

“Non-performing loans” – a debt that is either in or close to default – in the eurozone will peak at 6.5pc of all outstanding loans next year, a record high for the common currency, according to the accountancy company.

Ernst & Young’s Andy Baldwin said:

“While the ­effect of … a combination of the det­eriorating economy and the recurrent crises of confidence in the market … on bank balance sheets in 2012 is worrying, the real impact will not be seen until 2013, when [loan defaults] will hit harder than many are expecting.”

Marie Dixon, an economic adviser to Ernst & Young, added:

“Non-performing loans are a ticking time bomb for the eurozone economy.”

“Leniency from lenders to defaulting debtors is masking the true extent of their non-performing portfolios. As the economy continues to worsen, a larger portion of these loans will be pushed into [default] status, forcing banks to realise their losses and constricting further lending.”

“Larger firms will be able to draw down their cash balances or access alternative sources of funding, but smaller firms will struggle.”

Growth in 2012 is now expected to reach just 0.4pc or less this year rather than 0.5pc, while in 2013, “an expansion within 1pc to 1.3pc … appears more credible” than the earlier forecast of 1.7pc, he said in an interview published on the Figaro newspaper’s website.